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The first two months of this year saw euphoria. A sense of relief so strong you felt you could touch it ran through the air. The Dow hit a new all-time high, passing the previous record set in 2007. The S&P 500 followed suit. In the UK, the FTSE 100 began to approach its all-time high set back on the second from last day of the last century. In fact on March 14, the index of the UK’s 100 leading companies closed at 6529, just 192 points shy of the millennium high set in 2007, and 401 points off the all-time high, set on December 30 1999.

The surge in the indices was a puzzle. The UK economy was stuck in the mire, in the midst of its longest downturn ever recorded. The Eurozone was in recession. Even the BRICs seemed to be struggling and certainly India has lost much of its lustre of late.

The markets, however, took a look at corporate profits and smiled. They studied the words of ECB president Mario Draghi, who threatened to do whatever it takes to save the euro, and the smile became a big grin. They heard the words of Abe Shinzo, Japan’s new prime minister, and Haruhiko Kuroda, the new governor of Japan’s central banks, and the markets chortled.

Since then the mood has changed. The Cypriot banking debacle started it all. Fears that Slovenia may follow Cyprus in needing a bail-out compounded market anxiety. In the background Hungary’s difficulties persisted, and there was talk that democracy was dying in the country.

Then on Friday the latest report on US jobs was out. This time it was disappointing.
March saw an 88,000 increase in the number of US non-farm payrolls. You might respond by saying, but it was still an improvement. That, however, is not the point.

In the US there is a kind of tacit pact between employers and workers. The jobs market is highly flexible, labour laws are much less stringent in Europe, but unemployment is supposed to be lower. In short, in the US the philosophy is that employers create jobs: ‘Let’s make life easy for employers, and unemployment will be low’. This pact seems to be broken.

Sure US unemployment is much lower than in the troubled parts of the Eurozone, but it is at a similar level to that of the UK (US unemployment 7.6 per cent March, but 7.9 per cent in January, UK unemployment 7.8 per cent in January), and it is much higher than in Germany (5.4 per cent in February).

But the unemployment data does not tell the full story. The employment to population ratio is even more telling. The ratio of employed to the population of people aged between 16 and 64 is around 5 percentage points higher in Germany than in the US. Unemployment is higher in the US than in Germany, but Germany has the stricter labour laws, the less flexible labour market. See: Reducing unemployment: Lessons from Germany

Returning to the US jobs data, March was in fact the worse month for job creation since June last year. To put the 88,000 number in context, February saw a 268,000 increase in US non-farm payrolls. Oddly, despite the drop in job creation, the US unemployment rate fell to 7.6 per cent, which is the lowest level since before Obama became President.

More worryingly, however, March saw a 496,000 fall in the size of the US labour force. So sure, US percentage unemployment dropped, but only because of the substantial reduction in the size of the work force. Why this reduction? To an extent, many US workers are just giving up looking for work. They are falling out of the jobs stats.

Looking beyond the US to Europe, the job data is pretty scary. The average unemployment rate in the Eurozone in February was 12 per cent. It was 26.4 per cent in Greece (December figures), and 26.3 per cent in Spain, It was 10.8 per cent in France, 11.6 per cent in Italy.

The markets may have been celebrating all year, and waited until last week to become more cautious. But the jobs data has been awful for some time. Without a rise in employment, we cannot have a sustainable rise in aggregate demand, and until that happens, there is the danger that apparent corporate strength may prove an illusion, and worse than that, it’s an illusion the markets have bought.

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